While some companies use a single, plantwide manufacturing overhead rate, other firms use a different overhead rate for each production department.
Multiple departmental overhead rates are calculated using a two-stage allocation process. First, the company assigns its total budgeted manufacturing overhead to each production department. Second, each department calculates its unique departmental overhead rate using the cost drive for that department (machine hours, direct labor hours, etc.). When the product passes through a department, it is assigned manufacturing overhead using that department’s overhead rate.
Departmental overhead rates result in more accurate product costing.